The Dumbest Waste of Time Ever: How the Development Sector is Failing MSMEs
Updated: Dec 15, 2019
It seemed like a great business model.
Several years ago, I worked with a young solopreneur in Liberia – let’s call her Lucie – helping her with a business plan. She had figured out that she could make good money by purchasing agricultural produce that’s plentiful in one county (say, palm oil) and selling it in nearby counties where there was little supply but high demand, thus bringing higher prices. Even better, while she was in one county selling the palm oil, Lucie would pick up local fish at bargain prices and sell it in other counties that lacked access to fish.
It was a creative and effective alternative to the typical scenario that feeds the developing country poverty machine: everyone selling the same commodities in a limited market, all competing on price. The approach illustrated how street-smart entrepreneurs sometimes discover and exploit basic business principles like supply and demand, profit maximization or point of difference, although they don’t identify them as such. And it worked: Lucie’s sales numbers were impressive and growing. She asked her clientele what they wanted, delivered the goods at decent prices, and had no problem finding new customers. She routinely sold out her inventories.
Where Did the Money Go?
But there was one problem, and it was a biggie. She was confounded that she didn’t seem to have any money, and she couldn’t figure out where it went.
The single most common issue I encounter in my work with BoP microenterprises had bubbled up: Lucie kept very poor records and hadn’t accounted for all her expenses. The details vary with each business situation, but the outcome is always the same: These microenterprises have no idea on earth if they’re making or losing money – and unfortunately, this is the norm.
In this case, Lucie had arranged for a farmer in a distant county to grow custom items for her in exchange for a service fee. She provided the seeds and picked up the produce when it was harvested. But her expenses showed only the service fee. Her expression grew blank when I asked her about the cost of the seeds and the transportation back and forth to the farm.
She had been operating at a loss and never knew it. The higher her sales, the bigger the hole would become. Worse, her cash flow determined how much she could purchase and ultimately sell in the next cycle.
The Real Problem
Analyzing small businesses requires detective skills, and piecing together their financial status is usually a guessing game. Little is written down and receipts are rare. These business owners invariably underestimate their expenses, even as they precisely state their sales each season by memory. Entrepreneurs are optimists, after all.
And particularly in emerging markets, many entrepreneurs of necessity create businesses without the benefit of business skills training. Many lack basic literacy and numeracy skills, never mind an understanding of concepts like fixed and variable expenses. While the most common deficiency is record keeping, they usually don’t know how to manage daily operations or people, either. With no background in business or management, how could they?
An Error of Omission
The international development sector has only recently begun to focus on micro, small and medium enterprises (MSMEs) as the means to economic growth. We offer up seed money, small grants and microloans. We teach them how to improve yields and help them find markets. We try to create business-enabling environments.
Entrepreneurs need all of these things, to be sure, and one form of support is not more important than another. But if they don’t know how to run their businesses, what good is all the other stuff? Does anyone ever help them understand why they’re always short of cash and what to do about it? Do we show them how to invest in and grow their businesses, or how to develop simple plans or basic strategies? Not usually. Then we wonder why we can’t help them move out of poverty.
An Array of Solutions
While business skills development may be the most overlooked aspect of MSME development, it’s clear that we need an all-encompassing approach. Fortunately, there are organizations like TechnoServe and others that utilize a comprehensive methodology to build and strengthen small businesses. We could use many more programs with this type of focus. But we mustn’t treat all MSMEs the same. Microenterprises fall along a continuum and support programs must meet them where they are. Here are a few examples of how this can be done at various levels of entrepreneurship:
Level One – Basic is as Basic Does
The five-step “graduation approach” developed by BRAC works extremely well for the ultra-poor. Trickle Up has been using this process with women and achieving impressive results. Involving the entire community, graduation supports tiny businesses with small grants, continuous coaching and savings groups. This handholding helps women identify skills they can utilize to open a business (cooking, for example), and patiently bestows tools that spawn livelihoods and independence.
Level Two – Filling the Skills Gaps
Entrepreneurs often develop specific competencies through the school of hard knocks. They may have honed technical or selling proficiencies, for example, but are often missing the full lineup of business aptitudes. For microenterprises ready to move from informal to formal businesses, or individuals with some resources starting their first businesses, or rural community groups, basic skills training can be beneficial. This is also true in conflict and post-conflict zones, where business skills training can be essential to building economies. This training might involve basic business plans, market identification, product development and promotion, management skills and financial record keeping.
Level Three – Teaching them to Fish
Early-stage startups that are established but experiencing issues (such as lack of growth) seem to benefit most from soft skills such as leadership training, networking and development of sound business judgment. Limited but recent studies suggest that business skills training alone is not enough to sustain growth. That’s why MSME development programs are beginning to focus on broad skills that train mindsets and entrepreneurial thinking. The World Bank, for example, has seen success in West Africa with its innovative personal initiative training.
The Right Way
Regardless of their size, businesses at all levels need one thing: mentoring or coaching. Too many aid programs treat business skills development like one-off training. That’s useless. Microenterprises need nurturing over time because they face new challenges daily, and rookie entrepreneurs don’t yet have the skill sets to deal with them. Developing business plans and then leaving entrepreneurs to fend for themselves is the dumbest waste of time ever.
It really doesn’t take all that much to get these businesses on the right track, but it does take the right kind of assistance. The owners must learn management skills in the context of their own businesses; then the learning will stick. Workshops can be helpful, but well-designed customized support is most effective, and it must be provided over time – at least six months.
Relevant, level-appropriate and comprehensive support of small businesses can arguably be the most effective form of foreign aid.
Original article at www.nextbillion.net Reprinted with permission.